Working Paper: CEPR ID: DP3523
Authors: Andrew Bernard; Stephen Redding; Peter Schott; Helen Simpson
Abstract: This Paper develops a general test of factor price equalization that is robust to unobserved regional productivity differences, unobserved region-industry factor quality differences and variation in production technology across industries. We test relative factor price equalization across regions of the UK. Although the UK is small and densely populated, we find evidence of statistically significant and economically important departures from relative factor price equalization. Our estimates suggest three distinct relative factor price areas with a clear spatial structure. We explore explanations for these findings, including multiple cones of diversification, region-industry technology differences, agglomeration, and increasing returns to scale.
Keywords: diversification; cones; economic geography; relative factor prices; technology
JEL Codes: C14; F11; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unobserved differences in factor quality (L15) | wage structures (J31) |
| regional factor prices (F16) | unobserved variations in factor quality (L15) |
| regional variations in relative factor prices (F16) | firms' location decisions (R30) |
| increasing returns to scale (O40) | regional factor price structures (F16) |
| multiple cones of diversification (L25) | regional factor price structures (F16) |
| unobserved differences in consumer price indices (C43) | factor price equalization (F16) |